How A Competitive Market Functions Flashcards
What is the definition of disequilibrium?
A situation within the market where supply does not equal demand.
What is the definition of equilibrium?
The price at which demand is equal to supply and there is no tendency for change.
What is excess supply?
When there is a disequilibrium; supply exceeds demand so suppliers must lower the prices.
What is the signalling function?
When the market signals to the suppliers that they have oversupplied the product and that in order to sell it, the price must fall.
What is the incentive function?
When a market is indicating to suppliers that too many resources have been allocated to this product (supply exceeds demand).
Prices fall so less incentive to supply to this market; reallocate their resources.
What is the market-clearing price?
The price at which all goods that are supplied will be demanded.
What is excess demand?
When demand is greater than supply at a given price; pressurising suppliers to increase prices.
What does ‘ceteris paribus’ mean?
All other things being equal.
How does a market return to equilibrium?
WHEN DEMAND EXCEEDS SUPPLY
- Suppliers realise there is an excess demand
- They increase their prices as profit incentive
- Signalling to other suppliers to enter the market or to increase output
- ^ supply extends along supply curve
- Increasing price forces consumers to cut back some expenditure
- ^ demand contracts along curve
- Equilibrium is restored
What are factor markets? (Type of associated market)
An initial change in demand for one good will lead to a change in demand for the factors of production used to make it.
What is joint supply? (Type of associated market)
Where the increase in supply of one good increases the supply of the other e.g beef and leather
What is composite demand? (Type of associated market)
Where increases in the demand for one good reduces the available supply of the other.
E.g building industry on land reduces availability of residential housing
What are complementary good markets? (Type of associated market)
When demand for one product rises so then demand for associated markets increases also.
E.g demand for housing increases so mortgage markets increase also
What are substitute markets? (Type of associated market)
Where the changes to price or availability of substitutes affects the demand of another good.
E.g tesco reduces prices so demand for asda reduces too
What is a maximum price?
A price ceiling above which the price of a good or service is not allowed to increase. This can cause a secondary market (black market).
E.g sports tickets sold on discount websites such as eBay
